Discussion Question (Answer can be brief)

Real property closings have become increasingly controlled by federal regulation. Most federal regulations focus on lenders, and many have a direct impact on the real property closing. Federal regulatory bodies such as the Federal Reserve Bank, the Federal Home Loan Bank Board, the Office of the Controller of the Currency, the Federal Deposit Insurance Corporation, the Federal Savings and Loan Insurance Corporation, and the Department of Housing and Urban Development (HUD) have promulgated and enforce regulations pursuant to the Truth-in-Lending Act, Real Estate Settlement Procedures Act, Regulation B Equal Credit Opportunity Act, National Flood Insurance Act, Fair Credit Reporting Act, Fair Debt Collection Practices Act, Fair Housing Act, Community Reinvestment Act, Home Mortgage Disclosure Act, Home Ownership and Equity Protection Act, and Right to Financial Privacy Act. All these regulations affect how real estate closings take place.

The area has become so inundated with regulations that real estate attorneys and real estate paralegals must work hard to keep abreast of the changes. This discussion does not provide an in-depth review of all the regulations. Rather, it is a cursory overview of the main regulations that must be complied with when lenders make residential real estate loans.

REAL ESTATE SETTLEMENT PROCEDURES ACT

The Real Estate Settlement Procedures Act (RESPA), passed in 1974, was designed to reform the real estate closing or settlement process to ensure that consumers receive more information about the settlement and to protect consumers from unnecessarily high settlement costs. RESPA requires advance disclosure of settlement costs, eliminates kickbacks and referral fees, and mandates the maximum amount that may be required to be placed in escrow accounts for payment of recurring charges or assessments that affect the lender’s real property security.

Transactions Subject to RESPA

A real estate transaction that involves a federally related mortgage loan secured by a first lien on residential real property (defined as real property improved with a one- to fourfamily dwelling) is subject to RESPA. The term “federally related mortgage loan” is broadly defined. It includes loans that are

(a) made by a lender regulated by a federal agency or whose deposits are insured by a federal agency (such as a federal bank with deposits insured by the Federal Deposit Insurance Corporation or a federal savings and loan association with deposits insured by the Federal Savings and Loan Insurance Corporation);

(b) made, insured, guaranteed, supplemented, or assisted by a federal agency. Loans that would fall within this category are loans guaranteed by the Veterans Administration or by the Federal Housing Administration;

(d) made by a creditor who makes or invests more than $1 million per year in residential real estate loans.

Exemptions from RESPA

The following loan transactions are exempted from RESPA’s coverage:

●A loan to finance the purchase or transfer of twenty-five or more acres

●A loan primarily for business, commercial, or agricultural purposes

●A vacant lot loan in which no proceeds are used for construction of a one- to four family structure ●Construction loans, except when the construction loan is used or converted to a permanent loan to finance the purchase by a first user

Required Disclosures and Prohibitions under RESPA

RESPA provides for the following disclosures and prohibitions.

Special Information Booklet

A special information booklet written by HUD is to be distributed by lenders to each loan applicant within three business days after the application for credit. The booklet explains to consumers the costs related to real estate settlements.

Good Faith Estimates

Lenders are required to give the loan applicant a standardized “good faith estimate” (GFE), explaining rates, fees, and any prepayment penalties and other matters that the borrower is likely to incur to obtain the loan. A lender must issue a GFE no later than three business days after the lender receives an application for a loan. If changed circumstances would require new fees or costs or would make the GFE inaccurate, a lender is required to issue a revised GFE within three business days of receiving information sufficient to establish a changed circumstance.

Mortgage Servicing Disclosure Statement

Lenders are required to give the loan applicant a mortgage servicing disclosure statement that discloses to the applicant whether the lender intends to service the loan or transfer it to another lender.

Uniform Settlement Statement

RESPA requires the use of a uniform settlement statement (HUD–1) for all transactions that involve a federally related mortgage loan (see Exhibit 15–1 at the end of this chapter). All charges imposed on borrowers and sellers must be conspicuously and clearly itemized. HUD has prescribed regulations that contain line-by-line instructions for the correct completion of the forms.

One-Day Advance Inspection

On request of the borrower, the settlement agent (title company or attorney) must permit the borrower to inspect those settlement cost items known to the settlement agent during the business day immediately preceding the closing date. The settlement agent must provide the settlement form in as complete a condition as possible.

Escrow Limitation

RESPA permits a lender to establish an advance deposit escrow account to ensure the payment of recurring charges or assessments that affect the lender’s security. Typical escrow items include various taxes, insurance, and assessments. The lender may escrow an amount sufficient for the lender to pay the charges as they become due, plus a cushion of one-sixth (two months) of the estimated annual total charges. The lender is permitted to collect onetwelfth of the estimated annual total charges for escrow items with each monthly mortgage installment. For example, a mortgage loan closes on April 15, and the current year’s tax bills are due on October 1. The first payment under which the lender will receive onetwelfth of the tax amount will be made on June 1. At closing, the lender then can collect 10 months of the current year’s tax bill. How is this calculated? By indicating that 12 months end on October 1, the lender will receive one-twelfth on June 1, one-twelfth on July 1, onetwelfth on August 1, and one-twelfth September 1, or four-twelfths in total. The lender needs twelve-twelfths on October 1, so the lender will be eight months short. Because RESPA permits a lender to accumulate two additional months, the lender can collect 10 months tax escrow at closing.

The lender is also required to perform an escrow account analysis once during the year and notify borrowers of any shortage. Any excess of $50 or more must be returned to the borrower.

Title Insurance

A seller, as a condition of sale, must not require title insurance from any particular company. A violation of this regulation results in a seller’s being liable for three times the title insurance charge paid by the purchaser.

Kickbacks

RESPA provides that no person shall give and no person shall accept any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that involves the referral of business incident to or part of a real estate settlement involving a federally related loan. For example, (a) a lender cannot pay a real estate broker or another originating party a kickback to obtain business; (b) a real estate broker cannot pay a lender a kickback to obtain a loan for the client; (c) a title company cannot pay an attorney, abstractor, real estate broker, or lender a kickback to obtain business; (d) an attorney cannot pay a kickback to a lender, real estate broker, title company, abstractor, or others to obtain business; and (e) an insurance agent, surveyor, or termite inspector cannot pay a kickback to any party to obtain business.

Unearned Fees

RESPA provides that no person shall give and no person shall accept any portion, split, or percentage of any charge made or received for the rendering of a real estate settlement service in connection with a transaction that involves a federally related mortgage loan other than for services actually performed. A split payment for services actually performed is permitted by RESPA.

Penalties

The civil and criminal penalties for violation of RESPA are severe. The violator may be fined $10,000 and sentenced to 1 year of imprisonment. In addition, violators are liable for civil penalties in an amount equal to three times the amount of the fees wrongfully charged plus court costs and reasonable attorneys’ fees.

Paralegal’s Role

A paralegal’s main exposure to RESPA derives from the preparation of the uniform settlement statement at the time of closing. Instructions for completing the uniform settlement statement appear in Chapter 16.

TRUTH-IN-LENDING ACT

The Truth-in-Lending Act was passed by Congress on July 1, 1969. It was aimed at economically stabilizing and strengthening the competition among financial institutions by providing a means for the informed use of credit. Another purpose of the Act was to protect consumers against inaccurate and unfair billing practices and to facilitate the informed use of credit by requiring the disclosure of credit terms in such a manner that consumers can readily compare the various terms available from different lenders. The Truth-in-Lending Act continues to undergo periodic amendments.

Disclosures for Closed-End Real Property Transactions

Who Must Make Disclosures? The regulation requires that a creditor must make the disclosures. For purposes of closed end credit (a one-time advance by the lender), the regulations define “creditor” as a person to whom an obligation is payable and who regularly extends consumer credit that is subject to a finance charge or is payable by written agreement in more than four installments. For purposes of transactions secured by a home, a person “regularly extends consumer credit” only if credit has been extended more than four times in the preceding or current calendar year. Consumer credit is credit offered or extended primarily for personal, family, or household purposes.

Who Must Receive the Disclosure? The disclosure must be made to the consumer or borrower. The regulations define consumer as a natural person to whom consumer credit is offered.

When Must Disclosures Be Made? The initial truth-in-lending disclosure must be provided within three business days of application for the loan and at least seven business days before closing of the loan. If an initial truthin-lending disclosure is not correct, a final truth-in-lending disclosure must be received by the consumer at least three business days before loan closing. If the final truth-in-lending disclosure is mailed, the consumer is deemed to have received it three business days after mailing. In the event of a bona fide personal emergency, the consumer may waive the waiting period applicable to the initial and final disclosure. The waiver can only take place if the consumer has already received the disclosure at the time of the waiver. The initial and final truth-inlending disclosure must include the following notice: “You are not required to complete this agreement merely because you have received these disclosures or signed a loan application.”

What Format Must Be Used for Disclosure? The disclosures must be made clearly and conspicuously in writing and in a form that the consumer may keep. The disclosures must be segregated from all nondisclosure information. To comply with this requirement, the disclosure should be made on a separate sheet of paper or must be circumscribed from other information with a bold print dividing line.

The Federal Reserve Board has provided a series of standard disclosure forms to be used by lenders to comply with the regulations.

What Must Be Disclosed? Disclosure must be based on the terms of the legal obligation between the borrower and the lender. The note and mortgage establish the legal obligation. Disclosures that are not relevant to the transaction may be omitted. The law allows the following items to be disclosed at the option of the lender: the date of the transaction, the consumer’s name and address, the consumer’s account number, and an acknowledgment of receipt of the disclosure. The following disclosures must be made. Creditor. The creditor must be identified by name. The creditor’s address and telephone number must be included. Amount Financed. The amount financed is the amount of credit provided to the customer. The amount financed usually is the loan amount less the prepaid finance charges. Prepaid finance charges are discussed later in this chapter. Finance Charge. Finance charge is the cost of credit as a dollar amount. Subject to certain exceptions, the finance charge includes any charge or fee payable directly or indirectly by the consumer and imposed directly or indirectly by the creditor as an incident to or condition of an extension of credit. The finance charge must be disclosed more conspicuously than other disclosure items. The finance charge on most residential real estate loans is the total of all monthly payments made under the loan together with any loan discount or loan origination fees charged by the lender to make the loan.

Annual Percentage Rate

The annual percentage rate is the cost of credit as a yearly rate. A calculation of the annual percentage rate is a technical computation. Most law firms use calculators that have special programs designed to compute the annual percentage rate. The tolerance for inaccurate disclosure is one-eighth of one percentage point above or below the correct annual percentage rate.

Prepaid Finance Charge

The following items are prepaid finance charges that must be subtracted from the loan amount to arrive at the amount financed and added to the total payments made under the loan to arrive at the finance charge: (a) interest on the loan, (b) loan discount points, (c) service or carrying charges, (d) loan fees, (e) appraiser’s fees or credit reporting costs, and (f ) the cost of guaranty insurance to protect the creditor against consumer defaults, such as credit life insurance or private mortgage insurance.

Variable Rate Disclosure

When the annual percentage rate may increase after consummation of the transaction, such as would happen with an interest rate that varies according to some index, such as 3-year Treasury bills, the creditor must disclose the circumstances under which the rate may increase, any limitation on the increase, the effect of an increase, and an example of the payment terms that would result from an increase. No variable rate disclosure needs to be made if the payment schedule is known and fixed before consummation.

Payment Schedule

The creditor must disclose the number, amount, and timing of the payment schedule to repay the obligation. The payment schedule should include not only the repayment of principal, but also all elements of any finance charges imposed.

Total of Payments

The total of payments is the total amount the consumer will have paid if all scheduled payments are made.

Demand Feature

If the obligation has a demand feature—that is, it becomes due before its normal amortization—such demand feature must be disclosed.

Prepayment Provisions

The creditor is required to disclose whether or not a penalty will be assessed against a consumer if the obligation is prepaid in full before its normal maturity. In addition, the creditor must state whether the consumer will be entitled to a refund of part of a precomputed finance charge in the event of early prepayment.

Late Payment Charges

The creditor must disclose any charges that may be imposed for individual late payments before the maturity of the loan.

Security Interest

The creditor must describe any security interest taken as part of the transaction. If the security interest is in property being purchased with the proceeds of the transaction, disclosure need only provide a general identification. If the security interest is taken in property in a non-purchase money transaction, the property in which the security interest is taken must be identified by item or type.

Insurance Charges

If the contractual relationship between the creditor and the borrower requires property insurance coverage, that fact must be disclosed. In addition, a written disclosure is required of credit-related insurance, such as credit life or credit disability insurance, to exempt the cost of such insurance from the calculation of the finance charge.

Transactions Exempt from Truth-in-Lending

Truth-in-lending applies only to consumer transactions. If the loan or extension of credit is made to an entity other than a natural person, such as a corporation, a partnership, or a joint venture, truth-in-lending does not apply. If the purpose of the loan is for business, commercial, or agricultural purposes, truth-in-lending does not apply. The primary purpose of a transaction must be ascertained by reviewing the transaction as a whole.

Right of Rescission

In addition to the disclosure of credit terms, truth-in-lending provides the consumer homeowner with a right of rescission. The right of rescission gives the consumer, whose principal dwelling may be encumbered to secure a real estate loan, a three-business-day cooling-off period to think over the transaction and to cancel it for any reason without penalty. Loans created or retained to finance the acquisition or initial construction of a dwelling are exempt from the rescission rights. A loan transaction in which a state agency is a creditor and makes advances under a preexisting open-end credit plan (such as a home equity loan) are exempt from the rescission rights, if the security interest has already been retained and the advances are in accordance with a previously established credit limit for the plan.

Who Has the Right to Rescind?

Any natural person with an ownership interest in a dwelling who uses it as a principal residence has the right to rescind if that ownership is or may be encumbered in connection with the real estate loan transaction. Any person who has the right to rescind may rescind a transaction on behalf of others with the right with or without the consent of the other parties. For example, a husband and wife own a home; either the husband or the wife may rescind the transaction without the other’s permission.

Notice of the Right to Rescind

The creditor must give two copies of the notice of the right to rescind to each consumer who is entitled to rescind the transaction. The notice must be on a separate document that identifies the transaction. The transaction may be identified by its date alone. The notice also must disclose the following information: (a) the retention or acquisition of a security interest in the consumer’s principal dwelling, (b) the consumer’s right to rescind, (c) how the right of rescission may be exercised, (d) the effects of rescission, and (e) the date at midnight when the three-business-day rescission period expires. The Federal Reserve Board provides sample notices of the right to rescind for use in transactions (see Exhibit 15–3 at the end of this chapter). It is also a good practice to obtain an affidavit from the consumers indicating that they have not rescinded at the expiration of the three-day period (see Exhibit 15–4 at the end of this chapter).

How a Consumer Rescinds

A consumer may rescind a transaction by notifying the creditor in writing during the rescission period. A consumer has until midnight of the third business day following the receipt of a notice of right to rescind in which to rescind the transaction. For example, if a loan is closed on a Tuesday and the notice of right of rescission is given on the same day, the consumer has until midnight of Friday in which to rescind the loan. The rescission is effective on mailing of the notice, not on receipt.

Effect of Rescission

If the rescission is effective, the security interest giving rise to the right of rescission becomes void as of the time of rescission. The creditor has twenty days to terminate the security interest and return any money or property that has been given to any person in connection with the transaction.

Waiver of the Right to Rescind

The consumer may waive the right to rescind to permit performance during the rescission period. The consumer must inform the creditor in writing that the extension of credit is needed to meet a bona fide personal financial emergency period. This waiver, which cannot be on a preprinted form, must describe the emergency and must be signed and dated by all consumers who have a right to rescind. The Federal Reserve Board has asserted that it believes that the waiver of the right to rescind should not be a routine matter. Creditors are not insulated from liability for failing to provide a rescission right because they rely on a borrower’s waiver. Creditors must make a reasonable investigation to make sure that the waiver is bona fide.

Disbursement of Money before Expiration of Rescission Period

A creditor’s obligation does not end with the provision of the notice of the right to rescind. A creditor must be reasonably satisfied that any consumer with the right to rescind has not rescinded before any money or property is delivered or any services are performed under the transaction. A creditor may not disburse the loan proceeds until the rescission period has expired and the statement of nonrescission has been received.

HOME OWNERSHIP AND EQUITY PROTECTION ACT

The Truth-in-Lending Simplification Reform Act was amended in 1994 to include the Home Ownership and Equity Protection Act (HOEPA). HOEPA primarily aims to protect consumers who enter into “subprime loans.” These are non-purchase mortgage loans with high interest rates or up-front fees. These high-cost mortgages are typically aimed at homeowners with limited incomes who have developed equity in their homes as a result of paying down their first mortgages, through receiving an inheritance, or by a rise in real estate values.

Loans Regulated by HOEPA These include loans secured by a consumer’s principal dwelling where the annual percentage rate on the loan at consummation is more than 8 percentage points above the yield on Treasury securities that have comparable periods of maturity to the loan maturity. In addition, loans in which the total points or fees payable by the consumer at or before the loan is closed exceed the greater of 8 percent of the total loan amount or $625.00 are regulated by HOEPA.

HOEPA Disclosure and Prohibition HOEPA requires that certain disclosures be made by the lender, including a statement that the lender will have a mortgage on the consumer’s home and a warning that the consumer could lose the home and any money he or she puts into it if the consumer does not meet the obligations under the loan. The disclosures must also include the annual percentage rate and the amount of the regular monthly payment. If the loan is a variable interest rate loan, the following must be disclosed: (a) the potential increase in the interest rate and monthly payment and (b) the amount of a single maximum monthly payment based on the maximum interest rate increase. In addition, HOEPA prohibits certain terms in mortgage transactions that it regulates. HOEPA prohibits a balloon payment for a loan with a term of less than 5 years. It also prohibits negative amortized loans, that is, loans with a schedule of regular periodic payments that causes the principal balance to increase. HOPEA does not allow default-rate interest (an interest rate that would increase after a default on the loan). In addition, HOEPA prohibits any penalty or excessive charge to be assessed against a borrower who pays the loan in full ahead of schedule.

HOEPA and Higher-Priced Mortgage Loans HOEPA also governs certain residential loans identified as “higher-priced mortgage loans.” Higher-priced mortgage loans subject to HOEPA are consumer credit transactions secured by a consumer’s principal dwelling that, for first priority mortgage liens, have an interest rate 6.5 percentage points above the “Prime Offer Rate” and for second mortgage liens, have an interest rate 8.5 percentage points over the “Prime Offer Rate.” “Prime Offer Rate” is an average prime offer rate established by Freddie Mac, and such rates will be published at least weekly. Loans that have points and fees that exceed 5 percent of the total transaction amount are also subject to HOEPA. Higher-priced mortgage loans include home purchase loans, home improvement loans, refinancings, and home equity loans. The new rules prohibit certain acts in connection with higher-priced mortgage loans. These prohibited acts include (1) extending credit without determining that the borrower has the ability to repay; (2) relying on income and/or assets and failing to verify them using reasonably reliable third-party documentation; and (3) assessing a prepayment penalty if the loan payment can change in the initial four years from closing. If the loan payment cannot be changed in the initial four years, the prepayment penalty cannot last beyond the first two years from loan closing or be applicable to refinancing by the creditor or its affiliate. The new rules require impounding of property taxes and homeowner’s insurance premiums for all first lien higher-priced mortgage loans during the first five years of the loan. Creditors may offer the borrower the opportunity to cancel the escrow payments after one year. There is a limited exemption for condominiums and cooperatives when the association or board pays the insurance under a master policy.

ADJUSTABLE INTEREST RATE DISCLOSURES

The past several years have ushered in an unprecedented era of interest rate volatility. It is not unusual for interest rates to go up or down more than one percentage point in a given year. This interest rate volatility has caused many lenders and even many consumer borrowers to desire to have their interest rates on loans tied to some interest rate index. These loans are generally referred to as adjustable rate mortgage (ARM) loans. The rate of interest under an ARM adjusts based on an index such as the Treasury bill rate or prime lending rate. When this index increases or decreases due to the volatility of interest rates in the market, the interest rate on the loan will increase or decrease. During periods of increasing interest rates, the borrower will experience an increase in the mortgage payment, and during periods of decreasing interest rates, the borrower will experience a decrease in the mortgage payment. The federal government, believing that a borrower should be made aware of the risks and rewards inherent in an adjustable interest rate loan, has enacted laws that require mortgage lenders to disclose the terms of an adjustable interest rate loan.

Types of Loans Covered by ARM Disclosure Requirements The disclosure requirements apply to ARMs that are secured by a consumer’s principal one- to four-family residence and that have a term of more than one year. The loan must be extended primarily for personal, family, or household purposes.

When Must ARM Disclosures Be Made? ARM disclosures are required at the time an application form is provided to a consumer or before the consumer pays a nonrefundable fee for the loan, whichever is earlier.

Content of the Disclosure A consumer or borrower entering into an ARM loan is entitled to receive a copy of the Consumer Handbook on Adjustable Rate Mortgages, which is issued by the Federal Reserve Board. The borrower also is entitled to receive the following information: (a) the fact that the interest rate, payment, or term of the loan may change; (b) the index or formula used in making adjustments and a source of information about the index or formula; (c) an explanation of how the interest rate and payment will be determined, including an explanation of how the index is adjusted; (d) a statement that the consumer should ask about the current margin value or current interest rate; (e) if applicable, the fact that the interest rate will be discounted and a statement that the consumer should ask about the amount of the interest rate discount; (f) the frequency of interest rate and payment changes; (g) any rules relating to changes in the index, interest rate, payment amount, and outstanding loan balance, including, for example, an explanation of interest rate or payment limitations, any negative amortization, or interest rate carryover permitted; (h) a historical example based on a $10,000 loan amount that illustrates how payments and the loan balances would have been affected by interest rate changes implemented according to the terms of the loan program, based on the most recent 15 years of index values, including all significant loan program terms that would have been affected by the index movement during the period; (i) an explanation of how the consumer may calculate the payments for the loan amount based on the most recent payments shown on the historical example; (j) the maximum interest rate and payment for a $10,000 loan originated at the most recent interest rate shown on the historical sample and assuming the maximum periodic increases in rates and payments under the program, including the initial interest rate and payment for that loan; (k) the fact that the loan program contains a demand feature, if it does; and (l) the type of information that will be provided and notices of adjustments and the timing of such notices.

Subsequent Disclosures

The lender periodically must send an adjustment notice to the consumer. An adjustment notice must be sent at least once each year during which an interest rate adjustment is made without an accompanying payment change. If any payment change accompanies the interest rate adjustment, the lender must send an adjustment notice at least 25 calendar days but not more than 120 calendar days before a payment at the new level is due. An adjustment notice must contain the following information: (a) the current and prior interest rates; (b) the index values on which the current and prior interest rates are based; (c) the extent to which the creditor has forgone any increase in the interest rate; (d) the contractual effects of the adjustment, including the payment due after the adjustment is made and the statement of the loan balance; and (e) if the payment is different from that referred to in subsection (d), the monthly amount required to fully amortize the loan at the new interest over the remainder of the loan term.

Index Requirements

The ARM disclosure law also regulates the type of index that can be used for the adjustment in the interest rate. The requirements provide that the loan documents must specify an index to which the changes in the interest rate will be linked. The index must be readily available to and verifiable by the consumer and must be beyond the control of the lender. For example, a bank could not use its own prime lending rate as an index. A bank would have to use another bank’s prime lending rate or the rate on Treasury bills.

Interest Rate Cap

The Competitive Equality Banking Act of 1987 requires that any ARM loan secured by a lien on a one- to four-family dwelling originated by a national bank must include a lifetime cap on the interest rate. The maximum interest rate to be charged must be included in the initial ARM disclosure and in the loan documents. The interest cap must be stated in a manner that allows the consumer to easily ascertain what the rate ceiling will be over the term of the loan. For example: The maximum rate will not exceed ___%. The interest rate will never be higher than ___ percentage points above the initial rate of ___ percent.

PREDATORY LENDING LAWS

Subprime lending, as discussed in Chapter 9, is the business practice of making mortgage loans to people who do not have a good credit history or stable income. Subprime borrowers generally pay higher interest rates and fees for their mortgages than other borrowers. Loans from subprime lenders have enabled many people with poor or nonexistent credit history to obtain loans to buy a house. Some subprime lenders, however, have been guilty of preying on minorities, the poor, the less educated, and the elderly. Several states, in order to protect their citizens from predatory lending mortgage practices, have enacted predatory lending laws to prohibit the use of certain abusive mortgage loan practices. These predatory lending laws may vary in content from state to state, but there are certain general concepts that can be found throughout most states’ laws. The predatory lending laws generally regulate high-interest-rate or high-fee mortgages. The definition of a high-interest-rate or high-fee mortgage is found in the laws. Predatory lending laws may ●Cap the amount of prepayment fees that can be charged for an early payment of the high-cost loan. ●Prohibit the loan documents from allowing an increase in the interest rate after default. ●Prevent the lender from charging the borrower any fees or other charges to modify, renew, extend or amend a high-cost loan or to defer any payment due under the terms of the high-cost loan. Predatory lending laws may contain a number of other prohibitions, depending upon the concerns of a particular state’s legislature.

Most predatory lending laws prohibit the practice of flipping. Flipping occurs when a creditor makes a high-cost home loan to a borrower to refinance an existing home loan that has been consummated within the prior five years and the new high-cost loan does not provide reasonable tangible net benefits to the borrower, taking into account factors including the terms of both the new and refinanced loans, the cost of the new loan, and the borrower’s circumstances. In other words, flipping is when a lender talks a borrower into refinancing a lower-cost loan with a higher-cost loan. Most predatory lending laws subject violators to damages that may equal two times the interest paid under the loan or, in some cases, forfeiture of all interest under the loan. Many of the laws also pay for the attorneys’ fees borrowers incur in enforcing their rights under the laws. Because state predatory lending laws are not uniform, it is very difficult for many lenders to operate a national mortgage business and comply with all the various state laws. There have been recent requests for a single federal statute regulating predatory lending that would preempt the state laws and provide one set of nationwide rules.

MORTGAGE FRAUD

The favorable interest rate environment that has existed during the last several years has helped many people achieve home ownership and has resulted in a significant increase in the purchase and sale of single-family homes. This torrid pace in residential sales, loan closings, and refinancings of existing loans has also resulted in an increase in mortgage fraud. Mortgage fraud can take many shapes and scenarios. Mortgage fraud includes, among other schemes, the use of false appraisals, phony borrowers, stolen identities, forged deeds, and forged credit reports. Some mortgage fraud involves a network of appraisers, mortgage brokers, real estate agents, people known as “straw buyers,” and even lawyers in a scheme to artificially inflate the prices of homes. The straw buyers buy and sell the homes among themselves—a practice known as “house flipping”—because the houses change hands multiple times within a period of months, escalating in value at each sale as they pass in rapid succession from one straw buyer to another. The success of this crime requires appraisers willing to make fake appraisals that inflate property values; mortgage brokers and loan officers willing to take false applications for loans; and lawyers willing to close the flipped sales. The result is that on each sale the straw buyer obtains a maximum loan against the property that far exceeds the value of the property. The fake borrowers then take the loan money and flee the community, leaving the home empty. Mortgage fraud not only costs the mortgage and title insurance industry millions of dollars, but it also damages neighborhoods, which end up with several vacant homes that become magnets for vandalism and other criminal acts. Mortgage fraud also causes an appreciation in the value of properties, which may cause government authorities to increase the taxes for the honest homeowners based on the fraudulent inflated sales prices. Many states are addressing mortgage fraud by enacting mortgage fraud statutes making certain acts committed in the sale or closing of a mortgage loan criminal offenses. These statutes often authorize district attorneys to investigate and prosecute cases of mortgage fraud. Typically, a fraud statute will provide that any person commits the offense of mortgage fraud when such person, with the intent to defraud, knowingly makes any deliberate misstatement, misrepresentation, or omission during the mortgage loan process with the intention for it to be relied on by a mortgage lender, borrower, or any other party to the mortgage lending process. Mortgage fraud is generally a felony and can result in imprisonment or a fine.

Daniel F. Hinkel, Practical Real Estate Law 375 (7th ed. 2015).